1. Margaret Cragel
Principles of Finance - 341
Mid-Term Exam
Given: October 20, 2015
Due: October 30, 2015
Section Question 1
Is there any money you will say “no” to? If so, please explain.
Yes, I will say no to money that is earned unethically. As scripture says, “What
does it profit man to gain the whole world and forfeit his soul?” For example, with
interest rates we could potentially lie to a customer about a higher rate or create a higher
profit margin and gain more money. But instead since we are examples of Christ we must
be ethically truthful and earn less, and deny the unethical money. “A good name is to be
chosen rather than great riches, and favor is better than silver or gold” (Proverbs 22:1).
What is wealth? Where does it come from?
Worldly wealth is measured by material possessions, but eternal wealth is
measured by faithfulness to our Lord. Worldly material, such as wealth, is a gift from
God. Deuteronomy 8:1-20 (NIV) reminds us the wealth He has given us. Wealth is
described in this passage through examples such as, “[…] when you build fine houses
and settle down, and when your herds and flocks grow large and your silver and gold
increase and all you have is multiplied […] (12-13)”. After stating what wealth is, the
passage then continues on to remind us where the wealth has come from, “You may say to
yourself, “My power and the strength of my hands have produced this wealth for me.”
But remember the Lord your God, for it is he who gives you the ability to produce wealth,
and so confirms his covenant, which he swore to your ancestors, as it is today (17-18)”.
We are the ancestors being reminded today to not forget God, his commands, his laws,
and the wealth he has given us (11,18). Remember, true wealth is measured by faith, not
money.
What role does profit play in a business?
Profit is the businesses’ financial gain after calculating the difference between
amount earned and amount spent. The profit is an advantage, gift, and necessity for
company survival. Profit is also potentially an open door for an a company to increase in
employment, to invest in risk, and add credibility to the company.
How much time and effort should be expended on personal money management?
Personal money needs to be managed. We have been given the gift of money
from God and this cannot be treated poorly or put aside as sloppy work (Proverbs 18:9).
This involves a fair amount of time and effort for Gods will to be done. First, time and
effort towards earning money is necessary, obviously. Proverbs 12:27 says, “A lazy life is
an empty life, but “early to rise” gets the job done.” Once earned, money, the gift, is
very necessary for it to be managed for availability and profitability for proper fruit in
Gods’ kingdom to be grown. I believe that money management is also necessary to stay
debt free. How are we to be disciples through money when we are unavailable to

2. help/give to others? Proverbs 22:7 says, “The rich rule over the poor, and the borrower
is servant to the lender.” When managed properly we can then continue to give this gift
through prayer and guidance from God. For example, knowing who you give your money
to needs prayer and continued effort, “Protect yourself against the least bit of greed. Life
is not defined by what you have, even when you have a lot” (Luke 12:13-21).
What amount of personal annual salary is enough?
Enough in God’s eyes is the amount that helps glorify His kingdom. I believe
earning enough for discretionary income, with flexibility management (i.e. giving to
others, reward, and debt free). The Parable of the Rich Fool in Luke 12:13-21 explains
the role of profit in our life, this can teach us about a proper salary we need. In the
parable, God calls the man that stores up his riches for himself and not God a fool. Don’t
tell yourself that you’ve made enough salary for yourself and can now retire; instead
spend your money. Also, continue to work, “A lazy life is an empty life…” (Proverbs
12:17a). We must remember that value is found in faith not money. No amount of money
will ever be ‘enough’, considering you can continue to try to satisfy yourself with riches,
but will always be poor. Therefore, personal annual salary will be a gift from God and
determined by the demands in your life.
What is the goal of personal money management?
Money is a gift from God. This is not ours to manage for us but for the sake of
God’s will. I believe there are two main purposes behind managing your money. First,
manage your money so there is still room to give generously. Be available so there is
always opportunity for you to give at anytime (Deuteronomy 15:7-11). This makes you
an available disciple to help those in need, and give to those working for God’s kingdom.
Second, manage your money so you are debt free and prosper. A fool is a man who does
not spend his money, instead lets it sit, and going into debt takes away part of your
freedom as a servant for God. Psalm 37:21 says, “the wicked borrow and pay not again.”
Should you give money away? If so, how much? Why?
Yes, money should be spent. Money that sits has no gain for yourself or others.
It’s easy to say, “God gives me this gift of wealth and now I must spend it by being
fruitful”; but, how much? How much money you spend should be determined by your
wealth; a percentage. Further, money should be distributed according to the need (Acts
4:35). 2Corinthians 9:6-7 Paul writes, “The point is this: whoever sows sparingly will
also reap sparingly, and whoever sows bountifully will also reap bountifully. Each one
must give as he has decided in his heart, not reluctantly or under compulsion, for God
loves a cheerful giver.” I believe that God will place it in your heart when a large
percentage of your money should be given away for others to receive. When you give,
this is a way of God using you to give a gift, which will continue to become fruitful as
well.
How will you determine the recipients of your giving?
It would make sense to give to those who deserve to receive a gift. This is not the
answer though, since we have given our life to God, we now live a reverse economy. God
gave everyone the gift of his Son, and we are the most unworthy. Therefore we must

3. follow his example and give to anyone God leads us to give to, even if they are unworthy
in our eyes, or viewed as poor in our eyes. It is no longer giving to those that deserve a
gift, but those God calls us to give to. A great metaphor of giving is in Matthew 20:1-16.
The scripture ends in conversation between a Landowner explaining unworthy grace to
his workers. A worker says,”’These who were hired last worked only one hour […] and
you have made them equal to us who have borne the burden of the work and the heat of
the day. But he [the worker] answered one of them, ‘I am not being unfair to you, friend
[…] don’t I have the right to do what I want with my own money? Or are you envious
because I am generous? (12-15). This passage is an example of grace. The man who
worked one hour earned, as much as the man that worked all day, though he did not
deserve it. God is the determinate of who receives our giving.
How will you treat the poor? Why?
Treat the poor as equal as you; there is no difference. Money has no value in
God’s eyes. When the poor is in need, scripture says, “It is a sin to despise one’s
neighbor, but blessed is the one who is kind to the needy”, Proverbs 14:21 (NIV). There
will always be poor people, and God commands us to be an open hand to the people who
are poor and needy (Deuteronomy 15:11). Therefore treat the poor with an open hand.
We do this because the money is not ours to claim, it’s a gift from God, and because we
are equally as in debt to God giving his Son, therefore we have no right to determine who
is lesser than ourselves.

4. Section Question 2 Ratios
Annual Financial Ratio in Excel title “FIN341-1-CRAGEL-MIDTERMEXAMb”
Financial Ratios
Walmart Target Costco
WMT2014 TGT2014 COST2014
Profitability Ratio
Gross Profit Margin 24.83% 29.39% 12.87%
Operating Profit Margin 5.59% 6.25% 2.92%
Net Profit Margin 3.37% -2.25% 1.87%
ROA 8.03% -3.95% 6.23%
ROE 20.10% -11.69% 16.44%
ROI 13.36% -6.13% 11.69%
Liquidity Ratio
Current Ratio 0.97 1.20 1.22
Quick Ratio 0.28 0.45 0.63
Debt Ratio
Total Debt to Total Assets 26% N/A 62%
Debt to Equity 50% 91% 41%
Times Interest Earned 11.56 5.14 -28.50
Efficiency Ratio
Average Collection Period 5.09 N/A 3.8
Inventory Turnover 8.09 5.83 11.64
Total Asset Turnover 2.38 1.75 3.34
Market Value Ratio
P/E Ratio 16.84 -0.19 0.27
Price to Book 3.39 0.02 0.05
Growth Rates
Sales Growth
Series 1 Series 2 Series 3
2010 1% 4% 9%
2011 3% 4% 14%
2012 11% 5% 12%
2013 2% -1% 6%
2014 3% 2% 7%
Profit Growth
! ! !Series1 Series2 Series 3
2010 7% 7% 20%
2011 14% 0% 17%
2012 -4% 2% 15%
2013 8% -34% 17%
2014 2% -183% 1%

5. !2%$
0%$
2%$
4%$
6%$
8%$
10%$
12%$
14%$
16%$
2010$ 2011$ 2012$ 2013$ 2014$
Growth'in'Percentage'
Year'
Yearly'Sales'Growth'(%)'
Series$1$
Series$2$
Series$3$
!200%$
!150%$
!100%$
!50%$
0%$
50%$
2010$ 2011$ 2012$ 2013$ 2014$
Growth'in'Percentage'
Year'
Yearly'Pro7it'Growth'(%)'
Series1$
Series2$
Series$3$

6. Section Question 2 Ratio: A, B, C
A. From your analysis, determine which company has the best ration in each ratio
category for the most recent year. In a brief statement, explain why their ratio is the
best.
In my analysis between Walmart, Target and Costco for the ratio of recent years,
the bold numbers between each category is the best ration.
Successful profitability ratio is determined by the highest percentage. These are
comparing the companies’ net income by their sales, assets, shareholder equity and long-
term debt. Gross Profit Margin and Operating Profit Margin are lead by Target, followed
by a low percent difference is Walmart. Walmart has a huge profit increase when looking
at their Net Profit Margin, ROA, ROE and ROI.
The liquidity ratio of a company is determined strong with the ratio is high.
Liquidity is comparing the company’s current assets with their current liabilities and
inventory. Costco has the strongest Current Ratio and Quick Ratio compared to Walmart
and Target.
Debt ratios between Walmart, Target and Costco vary. When looking at the
companies Total Debt compared to Total Assets, Target is very strong because they hold
no debt. Comparing companies long-term debt to shareholders equity, Costco has the
strongest low percentage, also lesser than 50% compared to Target. Lastly, looking at the
companies’ ratios when comparing earnings before interest & tax to their interest
expense, Walmart stands with a high and strong ratio compared to Target and Costco.
Costco is doing very poorly when looking at their negative interest earned.
Now looking at Efficiency Ratio, these companies hold a quick turn over period.
The higher the ratio the lower the average collection period for the company is. Costco is
leading for company efficiency ratios when looking at their cost of goods sold, inventory,
sales and total assets. Target pressingly has a strong average collection period because
they have no debt of accounts receivable.
The market value ratio for companies should be high because that means its
increase on shares of stock. Leading for these is Costco. Their market stock price
compared to their net income and outstanding shares is incredibly high.
Growth rates show the companies sales growth and profit growth. Sales growth
between comparing 2009-current years show Costco as a major leader. Profit growth
shows a consistent percent growth for Costco. Target is very weak within that past year,
with a negative percent in profit of nearly 200%.

7. B. Please compare and contrast the cash flow (operating, investing and financing) of
each company and explain which company has the best cash flow and explain why?
($ in millions)
Operating (WMT) 28,564 (TGT) 4,439 (COST) 3984
Investing: (WMT) 11,125 (TGT) 1926 (COST) 2093
Financing: (WMT) 15,071 (TGT) 998 (COST) 5738
Walmart holds the best cash flow statement compared to Target and Costco by a
long shot. The statement of cash flow shows how companies are generating their cash in
three different ways; operating activities, investments, and financial activities. Most
important is the operating activities because this focuses mainly on the core company and
their firms business operations cash production. The operating cash flow of the company
will most likely produce more loyal shareholders if this is strong.
C. Using your analysis, determine which company would be the best investment,
and the second investment and the worst investment. In a short conclusion, provide
five reasons for your decision.
Since “Cash is king, more cash is better”, Walmart has the best cash flow statement.
I believe Walmart is the strongest company to invest with. They have the
strongest profitability ratios, best profit growth, best cash flow, times interest earned
compared to Costco and Target. These ratios are vital for a company because offensively
they determine the company’s success. Profit maximization is the role of a strong
company. Walmart does not hold strongly compared to Costco and Target’s other ratios,
but this slack is made up for in their cash flow statement. When analyzing the companies
cash flow, it is very clear the Walmart holds a very strong offensive position when
looking at the companies core profit. Their firm operates in a very strong position, which
I believe is best to trust based on the companies consistency in profit growth since 2009.
Costco is the second strongest investment between Walmart and Target. They are
strongest in liquidity ratio, debt ratio, market value ratio, yearly sales and profit growth.
They are extremely efficient and consistent on their returns. Being strongest between the
three in market value means they have strong shareholders. Though they are average
within competing between Walmart and Target on other ratios, I don’t think their
company is stable enough to invest with. Their high sales growth since 2009 does not
mirror their profit growth. Their cash flow statement is also very weak by millions
compared to Walmart.
Target is the worst investment compared to Walmart and Costco. They have the
strongest gross profit margin and operating profit margin between the three. Although
these are the strongest collection period, they are weaker than Walmart and Costco
compared to all other ratios. I view this as meaning they have a strong offence but not a
strong enough defense, and are still being out beat by other companies. Additionally, in
recent years they have gone extremely negative in profit growth, almost by 200%
compared to 2009 growth. The company does not have a strong enough core to consider
investing with.

8. Section Question 3
Chairman Letter Berkshire Hathaway 2012
Identify and comment on seven reasons for Warren Buffett’s success as an investor
– ideas that you can use.
(1) “It was far better to buy a wonderful business at a fair price than to buy a fair
business at a wonderful price”
Bargain-hunting usually results poorly, rather than wonderful business
investments resulting in very well cases.
(2) “Charlie and I believe in operating with many redundant layers of liquidity, and we
avoid any sort of obligation that could drain our cash in a material way.”
This reduced returns and is low risk.
(3) “Too much of a good thing can be wonderful.”
Berkshire has invested into four big companies; American Express, Coca-Cola,
IBM and Wells Fargo. They all had wonderful years with major increases. Here we can
learn from Berkshire that if a company is doing well and you value them, support them
by buying more shares.
(4) “The earnings that the four companies retain are often used for repurchases”
Following the third point, when earning a gain on the company, use that money to
buy more shares. This enhances future shares and funds business opportunities.
(5) “Charlie and I love investing large sums in worthwhile projects”
Invest in projects you believe in, even when other companies are in fear.
(6) “Charlie and I believe it’s a terrible mistake to try and dance in and out of it based
upon the turn of tarot cards and predictions of “experts”, or the ebb and flow of business
activity”
Berkshire explains here that the market is always unpredictable. Stocks will
prevail, and uncertainties will always exist. Stick with the stock and believe that
American business will do fine over time.
(7) “Adjusted numbers more accurately reflect the real expenses and profits of businesses
aggregated in the table”
This is talking about the balance statements. Charlie and Buffett warn investors
that they should understand the disparate nature of intangible assets. This is because some
depletes over time and some never lose value. This is why you must look at the expenses
and profit rather than income and expense data.

9. Mr. Buffett makes many comments about risk. Please explain five examples of
business/investment risk that Mr. Buffett discusses and elucidate what you learned
about the risk and reward tradeoff.
(1) “Charlie and I love these acquisitions: Usually they [bolt-on purchases] are low-risk,
burden headquarters not at all, and expand the scope of our proven managers.”
I learned that bolt-on acquisitions are companies that feed into core companies. Investing
into these help increase revenue to the small company and leading companies. These are
low risk because they are small investments.
(2) “The risk of being out of the game are huge compared to the risk of being in it.”
Here Buffett is explaining that the future market is always unpredictable. He says
American business will do fine over time, that set backs will always occur, but investors
and managers are in the game too and are heavily in your favor. In simple, it is dumb to
invest and sell in and out of stock rather than just sticking with it and knowing things will
turn around.
(3) “…never exposes Berkshire to risks that are inappropriate in relation to our
resources.”
Simply saying never invest with money you don’t have, even if there is insurance.
(4) “Indeed, we are far more conservative in avoiding risk than most large insurers.”
A lot of large companies with large insurers take large risk because they think they can
afford it, but they do not. They spend their money wisely and invest with purpose.
(5) “We continue to wind down the part of our derivatives portfolio that involved the
assumption by Berkshire of insurance-like risks.”
They do not want to be part of an ‘out of the blue’ even that would require their ‘posting
mountains of cash’ on a moment’s notice.
On page 6, Mr. Buffett summarizes his plan to build intrinsic value in five ways.
Please explain how each one of these activities will increase shareholder value.
“In summary, Charlie and I hope to build per-share intrinsic value by…”
(1) improving the earning power of our many subsidiaries;
They have increased funds to subsidiaries which in turn will increase shareholder value.
(2) further increasing their earnings through bolt-on acquisitions;
Bolt-on acquisitions are easy ways to have a low risk investment on small companies that
‘bolt-on’ or feed into the core companies. This investment increases shareholder value by
having low cost and high profit.
(3) participating in the growth of our investees;
Dividends and capital gain will increase when Berkshire shows interest in their investees.
By owning a portion of partnership with other wonderful business, investment will show
over time with greater earnings.

10. (4) repurchasing Berkshire shares when they are available at a meaningful discount
from intrinsic value; and
Mr. Buffet says on the first page that one investment the company made this year was in
their own stock. They achieved a total gain of $24.1 billion for its shareholders and used
$1.3 billion of that to repurchase their own stocks. By doing this, their stock increased
14.4% and increased their net worth by $22.8 billion.
(5) making an occasional large acquisition. We will also try to maximize results for you
by rarely, if ever, issuing Berkshire shares.”
It is far better to buy a wonderful business at a fair price than to buy a fair business at a
wonderful price.